Broker’s Obligation to Disclose Status of Illegal Property

June 26, 2018 | By Charles Botensten

Q: I am a real estate broker and I am listing a rental apartment that I am concerned may not have the proper permits. Am I obligated to confirm the legal status of an apartment before marketing it to the public?

A: Yes, the New York State Department of State ("DOS") recently confirmed, in an Opinion letter, that real estate brokers ("Brokers") must make a reasonable effort into verifying the legal status of the properties they market and must disclose, including in advertisements, any knowledge of a property’s illegal status to potential purchasers or tenants.

According to the DOS, "a broker who fails to demonstrate a working knowledge of the property being marketed, fails to demonstrate the level of competency required to transact business as a Broker in violation of [New York Real Property Law] §§441 and 441-c." This opinion is consistent with prior New York State Court decisions, which have held that Brokers are responsible to, "use due diligence in checking the information being provided by the seller from the easily accessible on-line public record." The DOS justified holding Brokers to this standard because of their status as real estate "professionals," whereas the purchaser and seller are presumed to be unsophisticated and untrained.

Furthermore, if a Broker has actual knowledge that a property is illegal (i.e. lacks a permit, etc.) such information, without exception, must be disclosed to potential purchasers. Any failure to disclose information actually known to a Broker will be considered a breach of the purchaser’s "confidence or reasonable expectation of fair dealing."

In order to ensure compliance, the DOS recommends that Brokers "make reasonable efforts to verify the legal status of the properties they are offering." A breach of this responsibility may result in disciplinary action against the individual Broker and their company. The Broker may also be required to return any commissions it received on the transaction, which would be deemed to be unearned.

Important Tip: A real estate broker’s obligation to disclose can involve complex issues.  Legal counsel should be consulted if the real estate broker has any questions or concerns about their disclosure obligations.

The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel

Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP